Question

Identify and discuss any five (5) major functions performed by the financial system.

Answer 1

Financial system is a combination of different financial institutions which facilitate transaction of funds in the financial market. There will be different participates in the financial system and they are the person who facilitate these function. There are lot of functions which are performing by financial system. Now we can analyse five major functions which are performed by financial syatem.

1. Capital formation - It is very important for a business to generate capital for the proper working. It is very important to collect the capital and this capital is considered as the base for the business. Without adequate capital a business can not run properly. So for a company a fair amount of capital is needed. So the financial system and different financial institution will provide funds for making capital contribution and these funds will be beneficial for the business.

2. Risk reduction - Risk management is very essential for every business. Some times business will face many consequences due to lack of money. This may be liquidity crisis. So at the time of non availability of funds financial institutions will provide fund for the business and will reduce the risk due to lack of funds.

3. Economic development - Financial institutions also facilitate economic development. These institutions have direct relationship between macro economic condition and all the money flow is facilitated through the financial institutions. The inflation and deflation in the economy and unstability of economic condition can be avoided by the financial system by proper lending and borrowing of money. So the financial institutions enhance the economic development.

4. Credit function - This can be considered as one of the major function of financial institutions that they will provide credit facility for their customers and they need to repay the money in a span of time. They will charge some interest for the money they lend and the customer need to repay the money with interest. So this will helps the people to allocate money for their sudden needs and thy need to repay only after a time span mentioned.

5. Financing Governement - Sometimes government needs huge funds for the infrastructural development. The may not able to allocate these funds through fiscal policies. So at that time government will borrow money from financial institutions. So this financial system will helps the governement to meet their needs by providing adequate funds. Governement will issue bonds for the purpose of allocation of money. So these are enhanced by finanacial systems.

These are some of the major functions performed by the financial system. Apart from that there is also many other functions are performing by financial system to enhance our economy and financial market.

ThankYou.............